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Article14 Jun 2023

When Private Eyes Are Smiling

A recent report from Citi Research’s Christopher Allen looks at the continuing rise of private markets.

Companies are staying private for longer or sometimes forever. The reason: Raising money in public markets is difficult. The dearth of recent IPOs and M&A activity only serves to underline this point. The Citi Research report says we’re entering a new era for private markets - one that is likely to present distinct challenges but also opportunity.

Cumulative returns by asset class (2007 = 100)


© 2023 Citigroup Inc. No redistribution without Citigroup’s written permission.
Source: Preqin, DataStream, and Citi Research

Preqin estimates that the private markets will expand to $18.3 trillion by 2027 compared with ~$12.8 trillion in the second half of last year. As traditional banks have pulled back from financing markets due to regulatory restrictions, companies have been increasingly turning to non-bank lenders in the private credit markets. Private credit offers more flexibility, a smaller number of lenders (which can often provide additional support), and a more streamlined capital raising mechanism.

Citi Research analysts say players will need scale, product innovation, distribution capabilities, global brand, and technology to succeed in the current environment and over the longer term. That said, the near term presents some challenges.

After a decade of fund-raising strength, with PE the main driver, the current environment paints a different picture. After strong outperformance relative to public market investments in 2022, LP allocations to PE have needed to be adjusted, particularly for US investors.

At the same time, PE firms’ fund-raising cycles shortened, increasing the number of players raising funds in the market at the same time even as demand fell. That still needs to be worked through, creating near-term headwinds.

Private market returns have performed well in a low interest rate environment. And they have also outperformed public returns on a consistent basis for an extended period (roughly 300 bps historically) as the alternative space has expanded.

Alternative asset managers have record levels of dry powder (estimated at more than $2 trillion across the industry). And managements have been noting improved outlooks for deployment of that capital.

For the most part, PE has been the key growth driver for the alternative asset managers over the long term, growing 15% over the past decade. Over the course of 2022, Citi Research analysts point to a shift in private equity, with heavy deal activity in 1H22, but then a marked slowdown in 2H22 that has extended into this year.

This shift has been felt across capital deployment, realizations, and fund-raising. Given the current uncertain economic environment and some fund-raising challenges around specific investor bases (US/Europe pension funds), the near-term environment is likely to remain somewhat challenged.

But the current economic backdrop and recent bank issues are starting to create long-term opportunities from a capital deployment perspective, which could create compelling investment opportunities. Citi Research analysts sum it up as near-term headwinds but long-term opportunities.

Alternative asset managers raised ~$1.3 trillion in capital in 2022, according to Preqin. This brought the total raised over the past five years to $6.4 trillion. The pace of fund-raising slowed over the course of the year as many funds found it challenging to raise capital. While this was true for the industry, the largest players did not feel the same level of pressure as their diversity, track records, and brands allowed them to continue to raise funds, which has persisted into 2023.

Funds greater than $5 billion accounted for 57% of capital raised in 2022, according to Preqin, with 93% of these funds reaching target and 15% exceeding targets.

In recent years, there has been an increasing focus on the private wealth channel by alternative asset managers. Individual investors are estimated to hold ~50% of the estimated ~$285 trillion in global AUM (~$130-$140 trillion estimated by Preqin in private wealth) and are underpenetrated from an alternatives perspective, with alternative assets only accounting for an estimated 2% of AUM.

Historically, alternative assets have delivered strong returns relative to public markets, with private equity returning 14% globally over the past 25 years compared with 7% for the MSCI Global Index, according to Bain & Co.

For more information on this subject, please see the full report, published on 18 May 2023, here: US Brokers & Asset Managers - Initiating Coverage: Prefer Structural Growth Plays (Alts.) Over Mixed Outlook for Traditionals

Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.




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